Outsourcing to India shows no signs of letting up

To cut costs in its growing business, the IT services subsidiary of Swedish transport equipment company AB Volvo moved some work offshore in 2002 to MindTree Consulting, a software services company in Bangalore, India.

The subsidiary, Volvo Information Technology AB (Volvo IT), has an operation in Poland that is doing application maintenance, but it wasn't easy to increase the number of staff in that country quickly, said Pär Forsberg, Volvo IT's competitive sourcing manager.

Working with an outsourcer gave Volvo IT flexibility in staffing. "We needed to be able to ramp up and down quickly depending on demand from clients and MindTree was able to meet that requirement," Forsberg said. MindTree also offered skills in the broad spectrum of technology areas that Volvo IT was working on, including Java, .Net, and technologies from SAP AG, he added.

MindTree now has about 300 staff doing work for Volvo IT, mainly in applications development, up from less than 20 four years ago.

Volvo is one of a large number of multinationals in the U.S., Europe, and Japan that have been flocking to India to outsource software development work, or to set up their own development operations in the country. Many of the U.S. and European companies are also moving call centers and back-office processing work to India.

The influx has been a boon to India's economy. Its revenue from software exports and IT services grew by about 33 percent in the year to March 31, to US$23.6 billion, according to Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM). The numbers include the revenue from both Indian outsourcing companies and the Indian software and services subsidiaries of multinationals.

India offers these companies a vast pool of talent at lower cost than they can find in the U.S. and Western Europe.

"We've started to see the cost benefits of migrating roles from the U.K. to India, and we are now also seeing a lot of innovation around our IT and business processes coming from the Indian operation," said Meena Ganesh, chief executive officer (CEO) of Tesco's Hindustan Service Center, a subsidiary of U.K. retailer Tesco PLC.

Tesco has 1,600 staff in Bangalore. About half develop software, and the rest run back-office processes such as internal support, payroll and accounts payable. Savings have been in the range of 30 to 40 percent, in line with the average for India, Ganesh said.

Multinationals like Tesco are also looking beyond low-cost coding work to tap the ability of their Indian staff to innovate. Yahoo India Research and Development, in Bangalore, does product development in the areas of multimedia search and user behavior analysis, said Venkat Panchapakesan, CEO of Yahoo Inc.'s Indian subsidiary. With over 750 staff, the R&D operation is Yahoo's largest outside the U.S.

India's key strength is that about 2.5 million students graduate every year. Education is still in English, a legacy of nearly two centuries of British colonial rule. English has also served as a link between India's numerous cultural and linguistic groups.